What is a 1031 Exchange and How Does it Work?

Businesswoman Calculating Invoice in reference to 1031 Exchange

A 1031 exchange is a powerful tool used by many real estate investors to defer capital gain taxes from the exchange of like-kind properties. Like-kind properties are properties held for investment, trade, or business purposes, regardless of grade or quality. Property in the United States is not considered like-kind property to properties outside the United States, and therefore, 1031 exchanges only apply to U.S. properties. Section 1031 rewards investors who reinvest their profits back into the market.

What Are the Different Types of 1031 Exchanges?

In a forward 1031 exchange, the investor must identify a like-kind property he or she wishes to buy within 45 days, and close on the property within 180 days. The investor must also file a Form 8824 with his or her tax return to report the exchange.

Investors who have the capital required to purchase the replacement property before selling an existing property can initiate a reverse exchange. The investor must identify the like-kind property he or she wishes to sell within 45 days and sell the property within 180 days of purchasing the new property. Like-kind exchanges involve the use of qualified intermediaries and exchange accommodation titleholders in the case of reverse like kind exchanges.

Although complex, 1031 exchanges are a powerful tool for real estate investors, allowing them to consistently reinvest their profits in real estate and build their wealth. Investors who are not familiar with 1031 exchanges should not try and complete one on their own. If you wish to learn more about 1031 exchanges, contact an experienced tax attorney today.

EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

Share this post